Financial Advisors: Overrated or Underrrated? Part II—The Return of the Financial Advisors

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

FInancial Advisors: Overrated or Underused? Part II

Like what was said at the last post, let’s talk about what to think about when thinking about selecting and hiring (and that’s exactly what you should be thinking of this as—a hire) a financial advisor.

Remember this: know who you are, if you need a financial advisor,  why you need a financial advisor, and, above all, that they work for you and not vice-versa.

Now, focus on the granular details of how to select a financial advisor.

These are the things you need to then consider when choosing a financial advisor:

  1. Who does your advisor work for? If he works for a large mutual fund family like Fidelity, then guess what? You will be only getting Fidelity funds advised to you regardless of their performance or fees compared to others that are in the same category. Keep that in mind. My take: steer clear of the advisors that work for mutual funds and go with someone who can always buy you best in class regardless of whose fund it is. Let performance determine what you invest into, not your advisor’s company.
  2. What are the total fees charged by your advisor?
  3. Is that fee structure determined by the total value of what is in your investment account (ie, total assets under management AKA AUM)? This is thankfully an increasingly common way financial advisors charge their fees. (Many others charge commission based on what they buy and/or sell…or even charging by the hour if you can believe that. Ensure that there are no other fees though…except the ones that all your mutual funds already charge you (AKA the expense ratio or ER). ASK IF THE ADVISOR IS “FEE ONLY”…Any answer other than an unqualified yes is a problem and a red flag that there are other charges headed your way.

  4. Is your total fee less than 1% of the value of your total assets under management? How much lower than 1%? You ideally should be in the 0.5% of AUM/year range ideally. It’s likely that you’ll get charged more early on when your assets are lower (a lot lower likely) in value and the fee rate will eventually drop as your assets grow in value making it an incentivized plan for your advisor to keep growing your money and for you to stay with said advisor.
  5. What exactly are you getting in return for your fees? A comprehensive financial plan based on sitting down with you and your spouse and understanding your risk tolerance/investment philosophy? Detailed financial analysis of each security you hold? Is your advisor willing to talk about the decision to buy or sell any security? (We all know the doctor who gets offended when asking about a treatment decision. Make sure your advisor isn’t a replication of the one doctor you most like avoiding.) Will there be an opportunity to ask about a stock or fund I heard about from friends/colleagues/family or the media and have you as an advisor research them and ensure it’s consistent with my/our risk tolerance/investment philosophy and is priced appropriately for a purchase…or explain why a purchase now or ever doesn’t make sense for you/your family.
  6. Will there be scheduled meetings regardless of what is happening to the markets and your own account? How often? Quarterly? Can you meet with your advisor face-to-face PRN as well? How accessible will they be via phone or email? (You’ll have to keep in mind what they say versus what they actually do.)
  7. Who is the advisor’s custodian? In other words, if he or she isn’t tied to Fidelity or Charles Schwab or etc, who is ensuring that their financial statements are on the up and up plus ensuring that the advisor isn’t taking your money for a ride? All advisors need to have a custodian or some type of brokerage firm that they are employed by or connected to that will ensure that there is not a rogue advisor you have stumbled on to. If there is no custodian, then there should be no you there either. How did Bernie Madoff get away with his Ponzi scheme so long? He had no custodian ensuring his clients’ financial security. And we all saw how that worked out.
  8. Ask your advisor-to-be about how they will be most tax efficient in investing for you. If you don’t understand the answers, make him or her explain it to you…SLOWLY and CLEARLY. If they can’t do so or get frustrated or defensive, you just saw a preview of your future with your advisor…so ON TO THE NEXT ONE…
  9. Going along with the above theme, if your advisor-to-be gets frustrated or defensive, etc with all the questions, then you have your answer…to paraphrase that sainted genius from long long ago, this isn’t the advisor you’re seeking.

Whew!

Methinks that’s enough for one post….

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Financial Advisors: Overrated or Underused? Part I

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Financial Advisors: Overrated or Underused? Part I

You know yourself and that’s what is best in guiding you in your decision on whether to engage a financial advisor or not..

Can you truly do the due diligence you need to to maintain your investment portfolio? Are you confident enough in your plan to stay the course in a market downturn and not panic selling everything in sight? How about your spouse? Will they weather the storm as well as you? Do you have  a way to ensure that you will consistently invest? Do you know how you will do it (eg, from your bank account to your investment account or directly into different stocks and funds every so often—weekly?, biweekly?, monthly?) and which investing platform (Vanguard, Fidelity, Ameritrade, or something else)? Will you look at your monthly or even quarterly statements, make sense of them, and then adjust or act accordingly?

If you can truly do all of the above realistically in your heart of hearts and not just because you want to or think you can, then by all means go for it.   

Otherwise, a financial advisor is your best bet to financial independence and peace of mind.

But like all goods and services, make sure you know what you’re getting in exchange for the money you’re handing over to your financial advisor.

First, how to find a financial advisor.

Obviously, you can just seek one out on the Internet and rely on the vagaries of Internet search engines, marketing, and (largely) anonymous reviews. Then, meet him or her and go from there.

The second and often most common way to find an advisor is to ask trusted friends and colleagues.  If you’re close enough to them, they should be able to be honest with you regarding how happy they are with their advisor. And, if you’re really close to them, they’ll just tell you how their returns are from year to year and how much they are charged. (If they don’t know the answers to any of these questions, then they definitely aren’t the ones you should take your financial advice from. In fact, send them to this blog, www.wealththyself.com, and teach them yourself what they don’t know.)

As a side note, I cannot understand why more close friends are so reluctant to talk about money and learn from one another, even—or especially—from their mistakes. It’s one of the main reasons why so many of us physicians struggle with our finances until mid-career—if you’re lucky it’s only that long. God knows that medical school and residency or fellowship taught you precisely zero in how to take care of your money, invest, and/or grow your hard earned money after nearly a decade (or longer) of education and training. All the professors and attendings tell you that it’s a calling and a noble privilege and not a job, but a way of life (all tur in one sense or another), but no one mentions let alone teaches you what to do with the money you’re finally earning especially in the only profession I know of where you go from one salary to five times (or greater) that amount for doing the exact same thing as the prior year.

ANYWAY…

Let’s delve into details on what to think about when you’re thinking about selecting and then hiring (and that is exactly what it is and what you should be thinking of it as) your financial advisor.

But let’s do it next time…  

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Rants, Part I

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

RANTS, Part I

One last fun post before we get back into more serious financial literacy/investing analysis…

We all have topics that get our blood angered up (as my brother describes it) whether it be work, pop culture, or politics.

Investing isn’t any different…at least not for me.

Fair warning: This will be a recurring theme.

A few things that are often bandied about as good investments that all should avail themselves of that rankle me to the very core of my existence.

#1 Bond Funds

As mentioned before, I hate them with a passion.

As risk of loss rises, so should the yield. Increased risk=increased reward. Otherwise, investing makes no sense whatsoever.

Bond funds are a combination of mutual funds and bonds. These are securities that own a basket of bonds and may buy and sell them as their yields fluctuate and the bonds themselves mature. Thus, the return on investment is largely determined by the bond yields held by the fund which isn’t very grand. Subtract the fee for the bond fund in question and then you have an even worse return—-possibly below that of inflation. Bummer!

Even worse is that bonds themselves should be quite secure in exchange of lower returns whereas bond funds can lose money as fast or even faster than mutual funds. This is especially true given that even a mild fluctuation in interest rates could set fire (as in torch, not “This is straight fire!” as the kids say nowadays or “This guy is on fire!” after hitting multiple successive three pointers in basketball) to your bond fund. Depending on the composition of your bond fund(s), you may have a staggeringly bad investment on your hands which you cannot get out of or even wait out until your losses are irreparable.

In summary, rather than own bond funds, do the following instead:

Buy actual funds (mutual funds, ETFs)

Buy actual bonds.     

And never should the twain meet…

#2 African Funds

I have absolutely nothing against the continent of Africa and have traveled there in the past and plan on doing so again in the near future. (Mrs. PWT is hoping as early as next year!) However, as an investment, this is not the region of the world to invest in. In theory, the continent should be an investor’s paradise—natural resources such as oil, gold, diamonds, etc., a cheap labor force, and a globalized world seeking both labor markets and markets to sell products. However, reality—corruption, wars, the aftermath of colonialism, civil strife, sheer incompetence, etc.—has interceded to disrupt that potential time and again.

For decades now, Africa has been touted as a frontier market that you need to invest in to get on the ground floor of the biggest investment of the next century. And, for decades, you would have lost money on betting on the “next frontier.”

A lot of money…

If you don’t know Africa well, haven’t traveled there multiple times, and keep abreast of all the twists and turns in the most complex continent on the planet (My opinion—may not even be worth two cents) as an election or a civil war or a rebellion may tip the promise of great returns into double digit losses—-or an insolvent fund.

This is neither for the faint of the heart or the new investor that hasn’t yet built a core investment portfolio before branching out into more esoteric or riskier investments where your knowledge is stretched to its maximum or even beyond.

In summary, rather than invest in an African only fund, do the following instead:  

Invest into an international fund where the entire globe is now part of your investment portfolio. It spreads out the risk across many countries including possibly African countries. And along with this, you’ll have a fund manager with a team of analysts that are not only experts in those foreign countries, but are paid to do nothing but pay attention to the events, gyrations, etc of each and every company, nation, and even region day by day.

Good luck keeping up that kind of investigation and still going to work and maintaining a family life as well.

Well…

There’s plenty more where that come from as you will read (hopefully) in upcoming posts months and years (?) from now.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Investing Slang Part Deux

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

INVESTING SLANG PART DEUX

Here we go with some more lingo to make you sound either really savagely cool or like a totally dorky poser. At any rate…

Altcoin: Any cryptocurrency that isn’t Bitcoin

Babysitting: holding a security that is lower than when it was purchased in hopes to wind up at least even on the transaction

“He’s glum because he is still babysitting that trade from almost a year ago. Someone should just put him out of his misery and give him keys to a dark room, a tumbler of scotch, and a loaded revolver.”

Bagholder: The person left holding an asset that has now become worthless

“That poor SOB didn’t realize it at the time, but he was the bagholder on Enron.”

Big Mac Index: Uses the price of a Big Mac in different countries to compare purchasing power

“Every multinational company thinks they’re geniuses, but they just all use the Big Mac index to figure how much they should charge everyone no matter what country they’re in.”

Bips: Basis points AKA one one-hundredth of one point/percent AKA 0.01%

“My guy [financial advisor] is the best guy in the universe. He only charges me 40 bips a year no matter what.”

Blue chip: A high quality publicly traded company (due to the fact that the highest value chips are blue)

“I only invest in blue chip stocks and don’t touch anything else.”

Buying or trading size: Trading a large number of shares or even securities

“He is big time now and is only trading size anymore…100,000 shares at a time at least.”

Clowngrade: When an analyst upgrades or downgrades a security (almost always a stock) because of a stupid reason

“That idiot at Morgan Stanley clowngraded Citibank because his now ex-girlfriend works there. What a putz.”

Dog: A chronically underperforming company/stock

“That stock sucsk so bad that it’s not just a dog, but a dog with fleas.”

Fat Finger Trade: A keyboard input error resulting in a buy or sell order for a differenrt (usually greater) price or a different (usually greater) amount among other possible input errors

Anyone that has ever texted knows exactly what this is, so no need usage example is needed here.

F*** You Money: The amount of cash needed to leave your current job and tell everyone what you REALLY think of them

F*** Everyone money: Some undecipherable amount of cash that is a high multiple (at least 20-100x) of the aforementioned F*** You Money where you and your descendants don’t ever work again in any real sense of the word  

On that note…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

 

Know the Lingo

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

INVESTING SLANG, PART 1

Let’s take a little break from hard core financial literacy and investing and talk about some of the lingo you’ll hear used on financial shows or blogs/books or even worse movies.

Amaranthed: A fund that takes large positions in companies that turn out to be wrong and then goes bankrupt much like Amaranth, a hedge fund focused on energy, in 2006

“I lost everything because my dumbass fund collapsed. I got Amaranthed.”

Bear: An investor who has a pessimistic view of how the market will do OR a market with negative returns currently

“Don’t listen to him. He’s a bear even in good times.”

“This bear market has pushed back my retirement at least two years.”

Blowup: When a critical mass of investors in fund all sell is a short time usually due to poor performance (but possibly other issues) resulting in the fund’s closure

“Great, Just great. My Latin American fund sucked so bad that it had a blowup leaving me with nothing. And Venezuelans thought they had it bad.”

Bull: An investor who has an optimistic view of how the market will do OR a market with positive returns currently

“This is such a bull market that even grandmas are becoming millionaires.”

Dead Cat Bounce: The temporary increase in a stock’s price after a huge drop before it starts falling again which may be mistaken for a stock that is now through its temporary troubles and is ready to climb up seeming like it’s a value when it’s actually a trap. Even a dead cat bounces up off the sidewalk.

“Don’t touch that stock. It was a falling knife and just entered its dead cat bounce phase. Don’t be fooled.”

Falling Knife: A security (usually a stock) experiencing a sharp downturn which may be mistaken for a good value on a company or fund

“Don’t dare put money in that thing. It’d be like catching a falling knife.”

Go long: An investor or fund that goes from a neutral or bearish outlook to a bullish one

“Wow! Did you see those new job numbers? I’m going long!”

Go short: An investor or fund that goes from a neutral or bullish outlook to a bearish one

“Ugh. Did you see those new job numbers? I’m going short!”

Hedge fund: An investment fund composed of capital from accredited (ie, high net worth) investors or institutional investors (ie, college endowments, retirement or pension funds, even cities if you can believe that) run by firms that use debt or leverage as a way to invest in any type of security, but usually are high risk/high reward and charge fees along with a percentage of profits that they generate for their investors (at least in their best years when they actually generate profits)

“I’m putting my money in a hedge fund because I’m probably too rich anyway and could use the tax write off when I inevitably lose all my money in this thinly veiled Ponzi scheme.”

Hedgie: Anyone working for or running a hedge fund

Hedgistan: The I-95 corridor between Manhattan and Westport, CT including the epicenter of the hedge fund world, Greenwich, CT

“Beware as we drive through Hedgistan. Guard your wallets.”

Paying for Beta: Fees to a fund that only gives investors returns that any index fund does at a much lower fee rate

“I love paying for beta because in addition to my stupidity in all money matters, I’m also a masochist.”

Perma-bear: an investor who has a persistently or even permanent negative outlook on the market

“He’s such perma-bear they call him Dr. Doom.”

(Probably not what you were expecting if you’re a Marvel comic books fan.)

Perma-bull: an investor who has a persistently or even permanent positive outlook on the market

“Look at that guy, The market is getting crushed like a car at the junkyard and he is still a perma-bull. Makes no damn sense.”

Random walkers: Investors who do not believe that they cannot outperform the market in any sustained period of time due to the inability of anyone reliably predicting the future performance of the market

There’s tons more where this came from and more will be posted both next week and again in the future for sure.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Portfolio Building Part VB: Examples of What We’re Talking About

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part VB

In the last post, we discussed a reasonable (perhaps even great) investing strategy with little (no?)  day-to-day effort on your part.

As a reminder, here is what was proposed:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

Let’s leave the stock behind for now and talk specifics on the funds.

As I’ve said many other times in other places, low fees is the key to outsized gains long term for index funds since they are more passive investing where they are matching (or, at least, attempting to match) the index they are designed to match.

Realize that there are several indexes that funds can follow at each level of market capitalization.

The S&P 500 and NASDAQ Composite Index are the two best known large cap indexes that are tracked. Another large cap index is the Russell 1000 (which is the compilation of the 1,000 largest publicly traded companies in the US).

The mid cap indexes are the  S&P Mid-Cap 400, the Russell Midcap Index, and the Wilshire US Mid-Cap Index.

The best known small cap indexes are the Russell 2000 Index and the S&P 600.

Cheapest Index Funds

S&P 500 Index Funds:

Vanguard 500 Index Fund Investor Shares

Symbol:  VFINX

Net Expense Ratio:  0.14%

Minimum Initial Investment:  $3,000

But if you can reach the initial investment requirement of $10,000 for their “Admiral” share class (symbol: VFIAX), you can get the cheapest available S&P 500 index fund with an expense ratio of 0.05% which translates into a $5 fee for every $10,000 invested.

Schwab S&P 500 Index (SWPPX): The expense ratio is 0.09%, or $9 for every $10,000 invested. The minimum initial investment is $100.

There are many, many large cap index funds that do not track the S&P 500 index, but rather other large cap indexes such as the Russell 1000, so feel free to look for them if you would prefer those rather than the ones that track the S&P 500.

Mid cap Index Funds:

Northern Mid Cap Index (NOMIX):

The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.

Vanguard Mid Cap Index (VIMSX):

The expense ratio is 0.20%, or $20 for every $10,000 invested, and the minimum initial investment is $3,000.

Small Cap Index Funds:

SPDR S&P 600 Small Cap ETF (SLY):

The expense ratio is 0.15%, or $15 for every $10,000 invested.

Vanguard Russell 2000 ETF (VTWO):

The expense ratio is 0.15%, or $15 for every $10,000 invested.

Vanguard Small-Cap Index Fund Investor Shares (NAESX):

The expense ratio is 0.17%, or $17 for every $10,000 invested with a minimum initial investment of $3,000.

However you can pony up the minimum initial investment of $10,000, you too can be invested in the Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) which charges a microscopic expense ratio of 0.05% or only a $5 fee for $10,000 invested.

How do they do it? Vanguard does it again!!

iShares Russell 2000 ETF (IWM):

The expense ratio is 0.20%, or $20 for every $10,000 invested.

Northern Small Cap Index (NSIDX):

The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.

Schwab Small Cap Index (SWSSX):

The expense ratio is 0.17%, or $17 for every $10,000 invested, and the minimum initial investment is $100.

And for those of you who want to look beyond the US borders…

International Stock Index Funds:

Vanguard Total International Stock Index (VGTSX):

The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $3,000.

Schwab International Index Fund (SWISX):

The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $100.

Let’s discuss two other types of funds that are less commonly invested in, but may be of interest to some, especially if you’re not going to invest in individual stocks and have a 25% void to fill (rather than making your S&P 500 fund, mid cap fund, and small cap fund 33% each which is a completely reasonable option).

You have never heard of micro cap companies/funds (if you don’t read all my posts—shame on you, reader—or have a faulty memory), but as hinted at they are smaller than small cap companies/funds.

A Quick review:

Mega caps>$200-$300 billion in market capitalization (remember that?) (it’s arguable on the cutoff especially since it’s a newer term that holds no real value in terms of funds, etc being set up to follow just these companies since there is no significant growth in these companies given how big they already are)

Large caps>$10 billion

Mid caps=$2 billion-$10 billion

Small caps=$300 ($500) million-$2 billion

Micro caps=$50 million-$300 million (or $500 million depending on who you ask/use as a resource)

Nano caps<$50 million

There are no true micro cap indexes as the two best known (the Russell Micro Cap Index and the Dow Jones Wilshire US Micro Cap Index) also include small cap companies in them thus skewing what the performance of the micro cap market actually is which makes it difficult or even impossible to see how your micro cap fund is doing versus all micro cap companies en toto.

And just forget the tracking of nano caps.

Micro Cap Index Funds:

For a relative unknown group of companies, there are dozens upon dozens of choices in the micro cap index fund world. So, good luck in your search at this market capitalization level of funds since it’s likely you may not know any of the component companies in these funds.

Bond Index Funds*:

Vanguard Total Bond Index (VBMFX):

The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $3,000.

Northern Bond Index (NOBOX):

The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $2,500.

*I loathe bond index funds as mentioned earlier as they combine the downside of low returns of bonds with the relative higher risk of mutual funds. But for the sake of completeness, the above are some inexpensive bond funds.

Blech!

As you can see, there are quite a few Vanguard funds here which is not surprising as they made their name and fortune on low cost index funds as others ridiculed them for it. Vanguard got the last laugh as it is now the largest fund family in the world with over a TRILLION dollars invested with them (AKA assets under management AKA AUM).

Certainly, there is no reason to invest in only the Vanguard funds alone as they are not always the cheapest as you can see from the above listings, but for the sake of convenience, Vanguard is as close as you can get to a one stop shop for all you low cost index fund shopping needs. Is that slightly increased cost on 1-2 funds worth less hassle than a few funds under Vanguard and then one under another fund family and yet one more under a third fund family? Only you can answer that question for yourself.

Well, that should about do it for this post.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Brick Upon Brick Redux

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

 

It’s not how much you have at the end; it’s how much you could have made.

 

Portfolio Building, Part V: Brick Upon Brick

After significant deliberation, I decided to re-post this from weeks ago with some key additions to the post to better explain the caveats and even pitfalls with certain aspects of portfolio building.

 My apologies for not thinking this through fully to have it in the first time, but I hope the additions are worth your time the second time around or for new guests, consider this the Greatest Post in Investing Blog History.

So here we go (again)… 

We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.

An easy way to set up a retirement portfolio is to do the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

There it is.

That’s it.

That’s all there it is to do to retire on Easy Street.

That simple.

Well, I guess I should close down the blog now.

 

What?

Wait, you want to know more?

OK then.

Let’s get started.

Let me introduce you to the brilliant David Fish  (RIP to the recently departed King of Dividend Investing) who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.

Dividend Challengers: the last consecutive 5-9 years

Dividend Contenders: the last consecutive 10-24 years

Dividend Champions: the last consecutive 25+ years

Then, to add to the confusion, there’s another overlapping category:

Dividend Aristocrats: the last consecutive 25+ years

SR: Umm…that’s the same thing there, Captain.

To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..

SR: The fix is in…

Dr. Scared: This is it!! This is how they screw you!!

PWT: Uuh..yeah..so anyway…

…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).

This “CCC” list is updated at the end of each month  by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.

To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.

Let’s take a look at the dividend aristocrats in particular.

These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving     allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epically awesome AKA The Unattainable Dream.)

As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.

Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :

3M–59

Coca-Cola–55

Johnson & Johnson–55

Colgate Palmolive–54

*Altria (Tobacco company; formerly Phillip Morris)–48

McDonald’s–42

RLI (Insurance Company)–42

Clorox–40

ExxonMobil–35

AT&T–34

*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.

It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).

So, in a portfolio sense, it would break down as the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)

Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).

Then just sit back and watch the returns roll in.

Several caveats:

1,) Realize that the above percentages (25% for each category with 2.5% of each stock) is how it will start, but not likely how it will be in 2, 5, 10, or a greater number of years. Stocks and funds will fluctuate and will also generate dividends in varying amounts at varying times which should then be purchasing those same stocks and funds at varying prices.WIth differences like that, it’s inevitable that some equities will race ahead of others over years to decades.

2.) This inequity in your equities (HA! I’m here all week folks!) may be perfectly fine and isn’t dangerous or problematic in of its own though some people rebalance their investments by shifting how much they pay into each equity to keep them the same as much  as possible (OCD much?). Rebalancing these equities will take constant monitoring and not an insignificant amount of calculating/effort to do so which is totally contrary to what any of us would like and certainly not the whole point of the “build it and feed it and otherwise leave it alone” system of retirement investing.

The one thing to note as equities separate out from one another is to realize that the inequity is blunted by the fact that the most expensive ones will wind up gaining fewer and fewer shares with each purchase due to their share prices relative to the other cheaper ones.

3.) Do NOT fall into the trap of changing your equal contribution towards the best performing equities and away from others. The point of having equal contributions is to have your savings spread out throughout the US or even global economy in case of fluctuations and especially in case of downturns. What is well performing one quarter or year or even decade may stall or even recede suddenly at the exact time where you keep putting in more and more money into that very equity. Don’t let market fluctuations in the short term distract you from a solid-great plan that will thrive over 25-35 years, not 25-35  days or even 25-35 months.

4.) A good argument against the above portfolio is that owning shares of mega cap companies in addition to a S&P 500 fund is that they are both representative of large cap companies which is now 50% of the portfolio with mid caps and small caps at 25% each. In addition, some people are just not comfortable with owning stocks of individual companies which I think is personally fine. Do what you’re comfortable with and not what you think you should be doing. None of this is worth having reflux or insomnia over. That is an absolute certitude.     

Before we finish, it’s time for a little shouting however.

THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.

END OF YELLING DISCLAIMER…

Thanks for tolerating my CYA tirade!

We will discuss evaluating individual stocks in a future post however.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Beyond The Foundation, Beyond The Nation

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part IV B

I said posting would be sparse, but the last few weeks was the reductio ad absurdum of that notion and for that I  am profoundly sorry.

Lot of things happened—some good, some bad—in the interval.

In short, life happened.

Once again, I’m truly sorry.

Anyway…

Let’s pick up where we left off.

You’ve decided you’ve wanted to have a small portion of your retirement portfolio invested in international funds.

One point before we move on:

Given how well diversified and well covered the US would be by a trio of S&P 500 fund, mid cap fund, and small cap fund, your international investing should be comprised only of countries that are based out of the US as to not overlap investments of the US based trio with your “international” fund (which if you’re not careful could be a “global fund” where 50% of the fund is actually invested in US companies all over again).

So now what?

Here are a few options for international investing:

1.) Pick what is known as “ex US” fund (which means any country “ex”cept the US) all for one simple fee (the lower, the better as always). This leaves tens of thousands of companies over dozens of countries, so someone or many people will need to do the research on where to put the money and to continue to follow if that remains a good investment. Therefore, these funds usually (but not always) will necessarily be actively managed, so mind those fees and make sure that the returns of the fund are rock solid in terms of how good they are and how consistent they are even after the fees are subtracted out.

Examples (but not suggestions): Vanguard FTSE All World ex US Index Fund, iShares MSCI ACWI ex US ETF (Yeah, even the names of these funds are intimidating.)

2.) Pick a regional fund which focuses on one geographic area such as Europe, Asia, the Middle East, Latin America, or even sole countries such as Japan or Turkey. It’s completely fine to do this, but there are several caveats to be noted here.

A,) You MUST have some general knowledge of the region or country. Vacations or a semester abroad fifteen years ago which was composed of mostly boozing is not field research and does not constitute deep understanding of international geopolitics. If you don’t understand the area/country, don’t invest in it solely. What makes it attractive now may be annihilated by  civil war, political strife, a trade war, sanctions, or just plain mismanagement among many other variables.

B.) You MUST know who the managers of these funds are that you are so enchanted with. You must know who they are, what their expertise in this region/country is, how long they have been managing the fund, how long they have been managing other funds or in the mutual fund business altogether, and, likely, most importantly, the fund managers’ performance (minus fees as always) at the fund you plan to invest in for the time he/she was the manager. If their performance is great/stellar and everything else checks out, then go ahead…but one last caveat—you need to ensure that you keep track of the fund manager himself/herself. If the manager retires/dies/move on, then you might have to do the same.

Examples (but not suggestions): VanEck Vectors Egypt Index ETF, iShares MSCI Chile Index Fund, WisdomTree India Earnings, Fidelity Nordic Fund

3.) A hybrid fund worth mentioning is the regional funds that mix and match geographic regions such as Middle East/Africa, Africa/Asia, or Europe/Middle East. All of the above caveats for regional/country funds still hold true even though (in theory only) the risk should be less with a wider geographic distribution to draw from.

Examples (but not suggestions): T. Rowe Price Africa & Middle East Fund, Commonwealth Australia/New Zealand Fund

4.) There are funds that group together disparate countries that may or may not have anything in common like the oft-mentioned BRIC (Brazil, Russia, India, China) nations which were rapidly developing with huge growth rates in their economies (not so much as it turns out especially since these countries have absolutely nothing to do with one another) or the lesser known CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa) which were touted to be emerging or frontier markets (which also didn’t quite work out…at least so far).

Examples (but not suggestions): The less said here, the better…

If this isn’t already confusing or daunting enough, then consider this: Not only are there country or region funds like the ones above, but then each country or region could also have large cap, mid cap, or small cap funds and then each of those could be value or growth or a blend between the two in investing style terms therefore each country/region could have at least nine types of funds to compare and contrast with one another.

5.) The potentially riskiest of all international investing for the average retail investor is the stocks of non-US based companies. If you aren’t already experienced in individual stock investing in the US or even the largest non-US based companies, then you shouldn’t think of putting your hard earned money into individual stock of lesser known companies that aren’t based in the US.

Examples (but not suggestions): Shell, BP. LVMH, Nestle; the lesser known companies are ones like WalMart of Mexico, Arcos Dorados (you already know what this is if you know Spanish), and Infosys which are all multi-billion dollar companies even though you may have never heard of them  

6.) International bonds, commodities, or even real estate are potential investments, but are the riskiest of the listed securities. These are neither for the faint of heart nor for the novice investor. If you haven’t been heavily invested and experienced with the above securities domestically first, then you shouldn’t even consider an international version.

Examples (but not suggestions): If you don’t already know, you don’t need to know.

Enough for one post…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Building on The Foundation: Portfolio Building, Part IV A

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part IV A

Sorry everyone. The posting will be a little sparse for the next weeks as I am in the midst of a ten day stretch in the ICU (12-14 hour stretches/day!) and then a short vacation promised to Mrs. PWT for some well deserved R&R.

“Gotta make money to save money” said some financially literate rapper…probably…or at least he should have…

Let’s delve into some alternative retirement portfolios that may interest you for better long term gains.

Here was the original proposed simple retirement portfolio from a prior post.

30% S&P 500 Index Fund

20% Mid Cap (Blended) Fund

20% Small Cap Blended Fund

20% Bonds

10% Cash

Note one thing: There is no large cap fund included in the above for the simple reason that the large cap fund in this case is the S&P 500 index fund. Having both would be a complete overlap of the same companies that would raise your risk of loss, but not necessarily enhance your gains beyond having all of that same money in just the S&P 500 index fund.

Let’s assume that you want higher returns than bonds and either eliminate that 20% completely or at least greatly reduce it (making up a figure here arbitrarily) to 5%.

Now, you have 15-20% extra to deal with.

Woo Hoo!!

The S&P 500, mid cap, and small cap funds have covered the US extremely well, so one way to go forward could be international funds. (Other options will be discussed in future post [s].) Your risk tolerance should be the guide to how much of that 20% (all? 15%, 10%, 5%., 0% AKA America is where I made my money, America is where I’m investing my money) will be invested in international funds.

Let’s discuss what “international” means for a moment. If you’re investing in solely US companies, don’t accept the criticism that you’re a nativist, xenophobic bigot (though you may be for entirely different reasons…I try not to judge…even those of you who had to look those fancy SAT words used earlier in this sentence…like “criticism”…Oh, were you thinking of some other words?).

Let’s consider your S&P 500 fund and think of some of its largest companies.  

Apple

Microsoft

Amazon

Facebook

Google (Sorry, I’m just never going to call it Alphabet)

Visa

Coca-Cola

Disney

McDonald’s

Walmart

These are all definitely US based companies, But, even if you’ve never traveled abroad (please do when you can though), you must realize that each of these companies generate billions upon billions of dollars from international markets. It’s no different than (Royal Dutch) Shell, BP (British Petroleum), or BMW (Bavarian Motor Works) making money in the US. The lines between what is a purely US company and a “foreign” company has been blurred with ongoing globalization. All multi-billion dollar companies throughout the world are truly international now. It makes sense: supply follow demand…and now with countries around the globe with rising incomes and increasing standards of living, goods from all around the world are being sold…uh, all around the world.

So, in summary, if you’re fearful of being invested in “international” stocks/funds, but are still regretful of not taking advantage of the global economy, don’t fret. You’re doing a lot more international investing/commerce/trade than you think are.

However, if you want into jump of the non-US part of the world pool (I’m not so great at metaphors), read on further…in the next post…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

 

Brick Upon Brick: How to Consider Starting a Portfolio with Stocks in It

 

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

The blessing (for me) and curse (for all of you) is that when I run into  insurmountable obstacles like endless revisions on the alternative funds only portfolios I can just move forward in time to a future post and then jump back in time  (like this guy) once I smooth out issues with what was supposed to be the prior post (Sorry if this makes no sense).

ANYWAY…here’s a discussion on portfolios with stocks…

Portfolio Building, Part V

We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.

An easy way to set up a retirement portfolio is to do the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

There it is.

That’s it.

That’s all there it is to do to retire on Easy Street.

That simple.

Well, I guess I should close down the blog now.

 

What?

Wait, you want to know more?

OK then.

Let’s get started.

Let me introduce you to the brilliant David Fish who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.

Dividend Challengers: the last consecutive 5-9 years

Dividend Contenders: the last consecutive 10-24 years

Dividend Champions: the last consecutive 25+ years

Then, to add to the confusion, there’s another overlapping category:

Dividend Aristocrats: the last consecutive 25+ years

SR: Umm…that’s the same thing there, Captain.

To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..

SR: The fix is in…

Dr. Scared: This is it!! This is how they screw you!!

PWT: Uuh..yeah..so anyway…

…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).

This “CCC” list is updated at the end of each month  by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.

To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.

Let’s take a look at the dividend aristocrats in particular.

These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving  allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epic and awesome AKA The Unattainable Dream.)

As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.

Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :

3M–59

Coca-Cola–55

Johnson & Johnson–55

Colgate Palmolive–54

*Altria (Tobacco company; formerly Phillip Morris)–48

McDonald’s–42

RLI (Insurance Company)–42

Clorox–40

ExxonMobil–35

AT&T–34

*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.

It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).

So, in a portfolio sense, it would break down as the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)

Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).

Then just sit back and watch the returns roll in.

Before we finish, it’s time for a little shouting however.

THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.

END OF YELLING DISCLAIMER…

Thanks for tolerating my CYA tirade!

We will discuss evaluating individual stocks in a future post however.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…